Well, it appears that one pattern may have emerged. Many homeowners who have already filed bankruptcy are receiving letters stating that their 2nd mortgage will be forgiven. Great news, right? Maybe. Some of these debtors are in active bankruptcy (chapter 7 & chapter 13). Some debtors have already received a bankruptcy discharge and are no longer personally liable for their mortgages. Other debtors have “stripped” their 2nd mortgages and BOA will likely receive much less than 100% of what is owed on the 2nd mortgage.

Not So Good

It appears that BOA may receive credit, against the amount it owes under the National Servicer Settlement Agreement, by forgiving mortgages they can could no longer collect or only collect a portion of. This may lead to fewer distressed homeowners actually benefiting from the Settlement.

There may be tax issues (the advice of a tax professional may be necessary).

Good

Distressed homeowners who are not in bankruptcy are receiving letters from BOA stating that their 2nd mortgages are being forgiven. This will make it easier for some homeowners to avoid foreclosure.

Debtors in bankruptcy who are paying back 100% of the arrears on their 2nd mortgages and their full 2nd mortgage payment have received notification that their loan is being forgiven. This could alleviate the need for a chapter 13 bankruptcy altogether.

Some homeowners may find themselves with instant home equity.

If you have any questions about this or other legal issues, call The Law Firm of Vaughn and Weber PLLC, at 516-858-2620, for a free consultation!

The above servicers have agreed to provide at least $25 billion in relief to distressed homeowners, the 49 participating states, and the federal government.

Well, have they?

Joseph A. Smith, Jr., the Monitor of the National Mortgage Settlement, recently released a “Progress Report” that outlines progress made by the five banks that are parties to the settlement. The Office of Mortgage Settlement Oversight stated the following in a recent Press Release:

“The report discloses that the banks have granted $10.56 billion in consumer relief to borrowers between March 1 and June 30, 2012. Additionally, first lien principal reduction trials were offered and begun for about 28,000 homeowners, totaling approximately $3 billion of potential relief,” said Smith. “This information is self-reported and has not been confirmed by the professional firms working with me. Further, it represents gross dollar amounts and cannot be used to evaluate progress toward the banks’ $20 billion obligation.”

In addition, the report provides an update on the banks’ implementation of the settlement’s servicing standards.

“As of July 5, the servicers reported to me that 56 servicing standards have been incorporated into their business processes,” continued Smith. “Implementation of the mortgage servicing standards outlined in the settlement can be an important contribution to reform of the mortgage finance system.

Our take: We find some of the language used and statements made in the press release somewhat vague and troublesome. Moreover, we have not seen much relief, under the Mortgage Servicer Settlement, for our clients facing foreclosure. However, it is our understanding that all the the new servicing standards must be implemented by October 3, 2012. Hopefully, we will see more help for distressed homeowners soon thereafter.

Just in case you missed or did not follow the link to the BOA Press Release. Here is the informative “Questions and Answers” section from the Press Release:

Questions and Answers

1. What is the second lien mortgage elimination offer?

We are offering eligible customers who are behind on their home loan payments the opportunity to have their remaining second lien mortgage debt eliminated. With this offer, the full unpaid principal balance on the second lien mortgage will be eliminated.

2. Why is Bank of America doing this?

These offers are part of Bank of America’s ongoing efforts to help customers in need of mortgage assistance and are among the customer relief programs we have launched under the national settlement agreement between the five largest mortgage servicers, state attorneys general and the federal government. The goal is to help customers remain in their homes and avoid foreclosure whenever possible. By eliminating this debt for eligible customers, we are trying to help them get back on track financially with their first mortgage payments and return to sustainable homeownership.

3. Who is eligible for the offer?

To qualify, customers must currently have a second lien mortgage owned and serviced by Bank of America that meets certain threshold delinquency or property value criteria, or a second lien mortgage associated with a first lien mortgage that is severely delinquent. Only second lien mortgages owned and serviced by Bank of America are eligible for this extinguishment program. It does not matter who owns and services the first lien mortgage. The vast majority of the second lien mortgages eligible for this program are in default in their subordinate lien position. A small number of second lien mortgages that are paid current will be extinguished if they are associated with a first lien mortgage that meets the program criteria.

4. How are you contacting eligible customers?

Eligible customers will receive letters from Bank of America via Federal Express or certified mail, explaining the offer to have their second lien mortgage debt eliminated. Mailings began in late July. At this time, only customers receiving letters will be eligible for the program.

5. Do customers have to accept the offer?

We will eliminate the remaining second lien mortgage debt for eligible customers, unless they contact the bank to decline the offer within 30 days of receiving the offer letter. Customers are asked to contact a Bank of America Home Loans representative at 1.800.496.7831 if they have questions or wish to decline the offer.

6. Are customers who are not contacted by the bank eligible for this program?

We will be contacting customers who are eligible to have their second lien mortgage debt eliminated. Customers cannot request to be part of the program.

7. How will second lien mortgage elimination impact the first mortgage?

The elimination of the second lien mortgage is completely separate from any actions being taken regarding the first mortgage. If the first mortgage is in foreclosure, those foreclosure activities may continue.

8. What happens if the customer is in foreclosure?

Although the second lien mortgage balance is being forgiven and the lien on this second mortgage is being extinguished, this action does not extinguish the customer’s first mortgage. If a customer’s first lien mortgage is impacted and in foreclosure, this will not stop the foreclosure proceedings; foreclosure activities are likely to continue. Customers should continue to answer and reply to all foreclosure communications from their first lien lender. If customers do not understand the legal consequences of the foreclosure, we encourage them to contact an attorney or housing counselor for assistance.

9. What are the tax implications of the forgiveness?

Bank of America is required to report the amount of the eliminated second lien mortgage debt to the Internal Revenue Service. Current federal law provides for certain exceptions to tax liability when debt is forgiven in connection with a foreclosure prevention transaction for some customers; however, debt elimination may trigger state and federal income tax liabilities for customers. To understand whether they qualify for one of these exceptions and what other tax implications this transaction may have, we urge customers to contact a tax professional. Additional information on mortgage debt forgiveness can be found at www.irs.gov.

10. How does this affect Bank of America’s implementation of the terms of the agreement?

The program is consistent with the provisions of the agreement for second lien mortgage debt forgiveness.

11. Are there other ways that customers can have their second lien mortgage debt eliminated?

Additional government-sponsored and proprietary Bank of America programs are available which may involve the partial or full elimination of second lien loans. Interested customers should call 1.800.669.6607 or visit http://homeloanhelp.bankofamerica.com/en/home-equity-modification.html.

12. For a home mortgage loan, what is the difference between principal reduction or forgiveness and lien elimination?

If a lender forgives a portion of a home loan’s principal balance, the borrower is responsible for the remaining balance due and the lender retains its lien on the borrower’s property as collateral for the loan. In a lien elimination, the entire balance of a mortgage loan is reduced to zero, the lien securing the loan is released and the mortgage note is cancelled. The lender has no further claim to the borrower’s property as collateral, and no further monetary claims against the customer.

13. Will a customer benefit if their second lien mortgage debt has been discharged in a bankruptcy filing?

Yes. While customers who have filed for bankruptcy and receive a discharge of their second lien mortgage debt obligations are no longer personally liable for the debt, the bank still remains a lien holder to the extent of the remaining balance on the second lien. This means the bank still has a legal claim to the customer’s property as collateral to satisfy the second lien mortgage debt still owed through a court-approved foreclosure, or if the property is sold for a gain. Once the debt is cancelled and the lien extinguished or released (subject to court approval, if required), the bank relinquishes any further monetary or collateral claim to the property. This reduces the debt attached to the property and may provide the opportunity for the borrower to build equity in their home.

14. Will this affect the customer’s credit rating?

Through the extinguishment program, we will report to the major credit bureaus that the customer’s second lien mortgage is now “paid and closed” and has a zero balance, which could affect a customer’s credit rating. A credit score is determined by the customer’s credit history and is not controlled by Bank of America. Customers should review information on credit scores at http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre24.shtm.

15. If the lien is extinguished in a bankruptcy filing, what are the credit reporting implications?

In the event debt is discharged through bankruptcy, the credit bureaus normally reflect that event as a loan or a debt discharge in a bankruptcy filing. Through the extinguishment program, we will report to the credit bureaus that the customer’s second lien mortgage is now “paid and closed” and has a zero balance.

16. How will Bank of America help customers who are still in need of assistance following the elimination of their second lien mortgage with the bank?

We want to work with customers to address their financial needs, especially if they are in need of assistance. Customers can always visit one of the 50 Customer Assistance centers in cities around the country or call 1.800.669.6607 or visit http://homeloanhelp.bankofamerica.com/en/home-equity-modification.html to find out about available programs.

BOA eliminates the full unpaid principal balance on some second mortgages.

Bank of America recently announced that it will be forgiving 2nd mortgages, for some homeowners, “under Bank of America’s participation in the 2012 national mortgage settlement.” We will be writing more about the 25 billion dollar National Mortgage Settlement soon, but, for now, here is part of BOA’s recent press release:

As part of Bank of America’s ongoing efforts to help customers in need of mortgage assistance, this company is in the process of mailing approximately 150,000 letters to pre-qualified homeowners offering automatic extinguishment of their second lien mortgages. The intention of the program is to place homeowners in an improved financial situation by reducing their monthly debt obligations and, potentially, help them create equity in their property.

The full forgiveness of second lien balances on eligible loans is being extended under Bank of America’s participation in the 2012 national mortgage settlement among the five largest mortgage servicers, 49 state attorneys general and the federal government.

Letters that began mailing in July 2012 and continue through the end of this year inform predetermined eligible homeowners that the full balance of their Bank of America-owned and -serviced second lien mortgage will be forgiven and the bank’s lien on the collateral property will be released free and clear, unless the customer opts out of this relief offer within 30 days of receiving the letter.

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